The video-on-demand business suffers from an image problem.
It has been playing second fiddle to television’s industry darling, broadband TV, for more than a year. What’s more, many programmers and advertising experts have been vocal in their criticism of VOD. They cite the ongoing problems: a lack of ubiquitous measurement, poor on-screen navigation and the sluggish rollout of ad insertion technology that will allow programmers to insert fresh ads on the fly.
But these broader issues ignore the master that VOD serves for cable operators—retention. Cablers did not conceive of VOD originally as an advertising medium. They saw it as a tool to keep their customers. And that’s what still matters most when it comes to assessing the success or failure of VOD as a business, according to analysts and operators.
“I have always seen [VOD] as four parts defense, one part offense,” said Bruce Leichtman, president of Leichtman Research Group.”It may not be direct bottom-line profitable, but it certainly is added value for your best digital subscribers. I don’t think operators see VOD as something that has to make money in and of itself. The model isn’t about profitability. It’s about retention and differentiation.”
Kaan Yigit, analyst with Solutions Research Group, agrees.”VOD is evolving into the most significant customer-retention tool a cable company has—against satellite, and increasingly, against broadband,” he said.”The gross revenue from VOD is not the right metric of success. [It is] still relatively quite small compared to other yardsticks and will remain so even though the growth rate will be significant.”
But VOD services do generate some dollars for operators through movies and via a cut of ad revenues. In the first quarter of this year, Comcast generated a 26 percent increase in pay-per-view revenues over the same period a year ago. That growth stems largely from VOD purchases. The company has logged pay-per-view increases of about 20 percent each quarter for the last nine quarters compared with the year-ago period.
Comcast finished 2006 with 1.8 billion VOD sessions—a hardy number that far outshines iTunes, which has sold 50 million episodes of TV shows since its October 2005 launch.
VOD’s secret weapon may lie in premium VOD services from networks such as HBO, Starz and Showtime. Premium VOD content plays a huge role in keeping premium subscribers happy. That’s important because premium customers are less likely to switch to another provider.
In a Leichtman survey conducted last summer, about 6 percent of premium on-demand customers said they were likely to switch service providers in the next six months, compared with 11 percent of all digital cable customers.
Premium VOD is part of the equation, Mr. Leichtman said.”That’s the customer you want to make happy because they are spending the money,” he said.
Satellite providers, by contrast, can’t offer premium channels on-demand.
Comcast averages about 200 million VOD views per month from a library of about 9,300 VOD programs. That compares with 130 million views a year ago. About 80 percent of digital cable customers use the service over a typical 90-day period, with the average home using it more than 20 times per month, Comcast said.
While critics say VOD has struggled to take off, Comcast’s Matt Strauss, senior VP of content acquisition and development, pointed out that VOD just reached full penetration, about 95 percent of digital homes, at the end of last year.
“Our valuing of success for on-demand was really this is an added-value to our digital cable subscribers and this is something we feel we can deliver that our competition can’t,” he said.
Comcast currently provides metrics through VOD measurement service Rentrak. Mr. Strauss believes that VOD will ultimately be the most measurable of any TV medium, because Rentrak measures each view and does not depend on a sample as Nielsen does.
Because VOD has now expanded well beyond movies, programmers, operators and advertisers have been eager to monetize the medium with ads and sponsorships. Comcast, for one, has already struck deals with New Balance and Gatorade for its Exercise TV VOD content, and has deals with several car makers.
“You are starting to see more and more advertisers go into the deeper end of the pool,” Mr. Strauss said.
Time Warner said it relies on VOD to deliver movies on demand and to experiment with new ad forms. VOD aids retention because it lets viewers watch content when it’s convenient.
Time Warner also uses its VOD service to deliver other features such as Start Over, which lets viewers start a program from the beginning even if they tune in during the middle, and for its Quick Clips service that delivers Internet videos to the TV.
But as a revenue generator unto itself, VOD hasn’t lived up to early expectations, said Ian Olgeirson, analyst with SNL Kagan.”It hasn’t really replaced the video store as a first stop to get a movie for a family,” he said.
However, the service has allowed cable operators to differentiate themselves from satellite providers, Mr. Olgeirson said.
“That’s a pretty significant deal,” he said.”VOD seems to have provided enough of a value-add to the consumer to sort of slow down the downgrade churn in digital as well as speed a little bit of the net additions as VOD has gained critical mass.”
That’s why measuring VOD as a direct profit center doesn’t show the whole picture, he said.”Without VOD, operators would be in a much worse position.”
The concept of profitability for VOD is tied closely to the concept of critical mass, said Paul Rule, president of VOD research firm Marquest Media & Entertainment Research.
“When VOD reaches the point that advertisers, agencies, producers and distributors start to see it as a vital part of the marketing and entertainment mix, solving the remaining technical issues will be given a priority and profits for all involved will flow forth. It seems like it’s taking a long time because we expect adoption of technologies to move quickly now,” Mr. Rule said.
Look for more changes in the VOD landscape in the coming months. Movie studios have begun to experiment with release windows so that more films are coming onto VOD at the same time they land on DVD.
Also, more broadcast prime-time content will appear on the VOD menu. Already, Comcast has struck deals with ABC, NBC and CBS for network shows.
And Comcast is adding hi-def content and local content to its VOD service. The operator started with about 100 hours of HD content last fall and expects to offer 250 by year-end and 400 by the end of 2008.